Gold, Silver, Metal Prices: Commentary – 11/16/2009

With but a week to go before its December options expire, gold bullion tracked a further accelerating, and nearly vertical ballistic trace overnight, as a slew of buy stops hit the market just moments after opening for electronic trade. Some 2,000 contracts went through the order pipeline in the initial minutes of trading – not something one sees on a routine basis. The yellow metal eventually set a fresh record spot peak at 1134.20 during the night, as the dollar fell precipitously towards the 75 mark on the trade-weighted index, and then eventually broke under it.

Carl Johansson, analyst over at Belgium’s GoldEssential.com wrote that he believed that "the orders [seen] on [market] opening were too large to be mere coincidence. A similar comment was made by a bullion trader at Commerzbank who saw that "someone had an interest in making a new high" and that " there are no bullish news that can give a reason for the move, so maybe someone is playing games and trying to protect their position." Talk of $1150 gold subsequently became the order of the new trading day in Asian and European overnight markets.

Johansson added that "option plays could also steer the market over the next few days, with the expiration of the December gold options now only 7 days away (Nov 23), but warned that prices could succumb to heavy profit taking once the weight of pending options and the attached expectations were lifted from the market’s shoulders."Profit-taking. Now there is a phenomenon that has been hardly visible at all since the first session in September.

New York spot bullion prices opened with fresh gains, albeit not as substantial as what had been witnessed during the overnight hours. Gold rose by $7.50 to start the Monday session at $1126.00 per ounce, as the dollar was hovering at 74.97 on the index, and as crude oil added nearly one dollar on the day, rising to $77.25 per barrel. Silver prices gained 30 cents to open at $17.72. Platinum was seen racing ahead by $27 to $1418 per ounce, while palladium gained $9 to $363 per troy ounce. Rhodium was quoted at $2087.50 per ounce.

Someone whom we have followed since the gold old days when financial channels were but a sparkle in TV executives’ eyes and a little Los Angeles station named KWHY-TV22 was among the pioneers of stock and commodity markets reporting, sees a not-so-comforting situation developing in gold even as these new, daily, records are etched into the books:

"Peter Eliades of Stockmarket Cycles, noted on Saturday morning (before the most recent fund-driven pop materialized) that: "Gold has had an upside projection to between 1111-1131 for several months and has now moved well into that projection window. That suggests it could be reaching a top here. The Fidelity Select Gold Fund has an equivalent upside projection between 52.17-56.40 and the CBOE gold has an equivalent projection to between 241.45-256.40.

"Unfortunately, those two projections do not align with the projections for the metal itself." The issue which bothers Eliades is that gold shares lag far behind. (CBOE gold index is an equity composite.) The major gold share indices were higher in early 2007 — gold is up over 60%! To some observers, this is very ominous." -writes Peter Brimelow over at Marketwatch, referring to Mr. Eliades’ observations. Brimelow also sees a gold bug camp that is far from satisfied that anything resembling a top is in fact being put into place around current levels.

Better-than-anticipated US retail sales figures hit the wires this morning, showing a consumer that keeps buying automobiles even in the post C4C-era. Taking the 7.4% rise in car sales, US retail numbers would have come in with only 0.2% gain for October, and some analysts have pointed to last week’s slumping consumer confidence level as a sign that such rosy numbers are not likely sustainable. Many an eye will of course be focused on the upcoming holiday shopping season, set to kick off in about ten days’ time.

Further signs that all is well in carry-trade land: the dollar slipped against major rivals Monday, after news U.S. retail sales rose more than economists predicted suggested improvement in the economy and emboldened investors to move towards riskier assets and away from the relative safe-haven of the greenback. -reported Marketwatch a few minutes after the data release.

As for Mr. Bernanke, he is due to speak at 12:15 p.m. Eastern but is expected to make references more to employment levels than a substantive change in Fed policy. This speech comes after a string of remarks by various Fed officials indicating why the US central bank remains reluctant to raise interest rates even as they acknowledged that ultra-low interest rates were contributing to weakness in the U.S. dollar and sparking the parallel rallies in commodities and equities (not usually a norm in the traditional market universe). "Central banks in general have avoided signaling any imminent withdrawal of extraordinary monetary measures, which will be seen as supportive of a strong risk environment into the year’s end."

Another underlying factor cited in the early Monday boom in metals was a substantially better reading from Japan, where GDP numbers for Q3 came in far higher than expected. Risk appetite turned to voracious levels following the release of the 1.2% growth number, and as President Obama got an indirect earful from a Chinese commerce department official who slammed the US policy of allowing the dollar to weaken while demanding a stronger yuan. Mr. Yao Jian saw an ‘increasingly protective US’ on the scene.

HSBC’s Steven Major, global head of fixed income research, opines that America’s current visitors to China still hold the better hand in the high-stakes poker game of global trade and finance. In a televised interview with Bloomberg this morning, Mr. Major said that despite the $797 billion being held by China in US Treasuries (Japan is in second place, with $731 billion in holdings), things are pretty much where both sides actually want them to be, all jawboning and market apprehensions aside.

Why? Because the interdependent, profitable, and close US-Chinese relationship (and its resultant levels of debt instrument holdings and apparently unbalanced trade flows) are actually mutually beneficial as opposed to ominously unbalanced or adversarial, and remain a matter of conscious choices on the part of the leadership of both nations. China is -in reality- quite happy to holding massive, highly liquid US dollar-denominated debt assets – quite a contrast to what a majority of observers keeps fretting about.

Of course, some Chinese officials see certain other asset class developments afoot as something to fret about, and they are taking a page straight from the script used by Prof. Nouriel Roubini just a couple of weeks ago. The one where graphic descriptions of growing spherical objects abound, and so do the warnings related to the puncture and collapse of same, at some point when everyone rushes the sole market exit door. Bloomberg reports that:

"The decline of the dollar and decisions in the U.S. not to raise interest rates have caused "huge" speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulatory Commission. "The continuous depreciation in the dollar has "seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies."

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis. "I’m scared and leaders should look out," Tsang said in Singapore Nov. 13. "America is doing exactly what Japan did last time," he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown. "The carry trades will further drive down the dollar’s value and fuel commodity prices," Zhao said. "The dollar’s depreciation has also caused excessive liquidity in the global market."

When word choices by officials include items such as ‘huge’ ‘excessive’ ‘scared’ ‘serious’ and similar, well, something is up. Not as regards China and its dollar holdings, but more like the state of certain bubblicious assets. Something that makes fresh, starry-eyed forecasts and findings by certain funds look just a bit suspect at the moment. For example, the BlackRock fund’s pronouncements about how one ought to be ignoring the current situation, as it is not a bubble, and the feeling that all commodities have nothing but a clear road ahead of them.

The "China card" (you know, the one about the insatiable appetite for commodities) was once again trotted out, as such reassuring prognostications were being made. Then again, this comes from a source that believes mortgage securitization was a "good thing." Of course it was. For some. Trouble is, some of those ‘some’ are no longer around to see the fallout from such "goodness."

The absence of goodness and the presence of unbridled greed was very much on the mind of the Pope as he reflected on one commodity that actually is essential. While the debate rages on about the causes of global food problems (speculation versus natural causes) Bloomberg reports that: "A United Nations summit on food security opened with leaders slamming rich nations for worsening world hunger by allowing speculation in agricultural markets and using subsidies that hurt production in developing nations. Pope Benedict XVI cited "greed which causes speculation to rear its head even in the marketing of cereals, as if food were to be treated just like any other commodity."

Brazilian President Luiz Inacio Lula da Silva, who called hunger "the most terrible weapon of mass destruction ," urged rich nations to meet their commitments to boost investment in agricultural in poor nations and to end "shameful" farming subsidies. "They sabotage emerging agriculture in the poorer countries, wiping out their hope to create a bridge to development," Lula said.

Jacques Diouf, who is hosting the meeting as FAO’s director general, has urged governments to invest $44 billion a year to end chronic hunger suffered by 1.02 billion people and achieve "food security." World hunger has continued to rise even with food prices falling from their peaks of last year, which coincided with FAO’s previous summit, where donors pledged $11 billion in aid. "We have had a warning call with the triple threat of the food, fuel and financial crisis," Josette Sheeran, executive director of the World Food Programme, said in an interview today. "Food security is back as one of the central issues of humanity; if you read human history it is the pursuit of food security."

In the meantime, funds will "carry" on. Greed (as fear) knows no bounds.